States with sales tax holidays rethink them

updated 4:07 p.m. ET Aug. 10, 2008

ATLANTA - Thousands of shoppers have been flocking to malls in more than a dozen states for back-to-school sales tax holidays, buying millions of dollars worth of clothes and school supplies — and depriving states of much-needed revenue.

The tax holidays offer a financial relief valve to families grappling with high gas and food prices, and are a welcome tradition among retailers. But some lawmakers, economists — and even some shoppers — are questioning why states are suspending sales taxes amid a slumping economy. Several states have called off the event entirely.

Vanessa Lee of Atlanta snagged six pairs of sneakers and a few dresses for $115 during Georgia's tax holiday at the start of this month. But the 42-year-old mother of three daughters in elementary school said she would rather have paid the taxes and seen the money go toward education.

"We could do away with the holiday," Lee said. "I would hate to see our teachers and classrooms lose out on money because the state doesn't have enough revenue."

Sixteen states and the District of Columbia hold tax holidays, usually one weekend a year in which clothing, classroom supplies and energy-efficient appliances are exempt from sales tax.

"I understand why legislators want to give people a break — because the economy is down and people are hurting and can't afford the things they want to buy," said Kim Rueben, public finance economist for the nonpartisan Tax Policy Center. "But they aren't taking into account what that revenue could later buy for the states."

Sales tax holidays Alabama: Aug. 1-3 — clothing, computers, school supplies, books Connecticut: Aug. 17-23 — clothing and footwear District of Columbia: Aug. 2-10 — clothing, school supplies; Nov. 21-Dec. 7 — clothing Georgia: July 31-Aug. 3 — clothing, footwear, school supplies, computers; Oct. 2-5 — energy and water-efficient products Iowa: Aug. 1-2 — clothing Louisiana: May 24-25 — hurricane preparedness items; Aug. 1-2 — all retail items Massachusetts: Aug. 16-17 — all retail items Missouri: Aug. 1-3 — clothing, computers, school supplies New Mexico: Aug. 1-3 — clothing, computers, school supplies North Carolina: Aug. 1-3 — clothing, computers, school supplies and sports equipment Oklahoma: Aug. 1-3 — clothing South Carolina: Aug. 1-3 — clothing, computers, school supplies, Tennessee: April 25-27 — clothing, computers, school supplies; Aug. 1-3 — clothing, computers and school supplies Texas: May 24-26 — energy star products and air conditioners; Aug 15-17 — clothing and backpacks Vermont: July 12-18 — all retail items; July 12-18 — energy star appliances Virginia: May 25-31 — hurricane preparedness items and generators; Aug. 1-3 — clothing and school supplies; Oct. 10-13 — energy-efficient products West Virginia: Sept. 1-7 — energy-efficient products

Legislators in some states are heeding such advice and may do away with the holidays amid increasing pressure to spend state dollars on bolstering infrastructure or improving schools.

Maryland lawmakers last year put the state's tax holiday on hold until at least 2010, which could drive the state's shoppers to Washington and Virginia for tax holidays. And Florida quashed its two tax holidays for hurricane and back-to-school supplies this year.

Politicians in Maryland blamed a mounting deficit that now tops $1.7 billion for suspending the holiday, which cost the state an estimated $5 million in 2006. Even so, legislators seem reluctant to criticize a popular program.

Maryland Del. Charles Barkley, a Democrat, said he supported the holiday because it "gets people out and spending money."

Florida leaders offered a different reasoning for calling off the holiday, which cost the state an estimated $12 million. State Senate President Ken Pruitt said economists scored it as a loss to the state, and said the National Retail Federation failed to prove that consumers would ultimately save money at the register.

"We've given them the benefit of the doubt for a long time," Pruitt said. "They couldn't show there would be savings for Floridians."

For advocates, the flagging economy makes the tax holidays more crucial than ever.

Lawmakers in Massachusetts, which offers perhaps the nation's broadest sales tax holiday — all retail items up to $2,500 are exempt from tax — renewed the two-day event this year despite the tough economy.

"A sales-tax-free weekend will be welcomed more than ever in this tough economy, especially with the high prices of food and fuel," Senate President Therese Murray said. "It is certainly worth it when you consider the positive impact on retail sales and consumer confidence."

States started adopting the sales tax holidays in the late 1990s, and by 2001 a dozen states held them. The list shrank to eight the next year as states grappled with an economic downturn after the Sept. 11 attacks.

The Washington-based National Retail Federation, one of the staunchest supporters of the holidays, said they spur a 10 percent bump in sales, but it has no data to back it up.

"There's just something about a sales tax holiday that's different from a regular sale," said J. Craig Shearman, a vice president for the federation, noting the event's "psychological appeal."

"There are a lot of families out there struggling to make ends meet, and they're having to stretch their dollars," he said. "While the 5 percent or so savings doesn't sound like a lot, that could be a make-or-break."

Economists say the holiday tends to lure families already prepared to make a key purchase.

"It's the same sort of family that collects coupons for the grocery store that waits for tax holidays to shop," said Chris Edwards, the director of tax policy studies at the libertarian Cato Institute. "Consumers time their purchases to coincide with the holiday."

In Georgia, which was forced to slash state funding and delay pay raises amid a $1.6 billion deficit, critics worry that the sales tax holiday could backfire.

"The sales tax holiday is really more of a political gimmick than good economic policy," said Alan Essig, executive director of the Georgia Budget and Policy Institute. "The big losers are state revenue and state services."

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